Target Corporation Falls After Lowering Guidance On Comps, Margins

Target Corporation (NYSE:TGT) was down 4% in trading Tuesday after lowering its second quarter adjusted EPS guidance from the $0.85 - $1.00 range down to $0.78, reflecting flat US comps and weak EBITDA margins.

"The issue in the U.S. appears to be today's heightened promotional backdrop - exposing retailers that cannot defend their gross margins, such as Target," write Sterne Agee analysts Charles Grom, Renato Basanta and John Parke, who have adjusted their 2014 estimates but maintained a Neutral rating and $54 price target for Target Corporation.

Target's US comps now appear 'flat to slightly positive'

Retailers like Target Corporation have been trying to satisfy contradictory goals of bringing in more traffic, typically with promotions, while defending sales margins so finding out that 2Q US comps are 'flat to slightly positive' and EBITDA margins are lower than expected is something of a double whammy, which explains Tuesday's sell-off. Canadian stores also had lower than expected sales and more excess inventory that had to be cleared out.

One of the themes for the last earnings season was the impact that especially harsh winter weather had on first quarter earnings. While plenty of companies really have rebounded in the second quarter, Target doesn't have the growth that it's been promising or the weather to blame for its ills.

Data breach losses now include accruals to payment card networks

Today's announcement also had more information about GAAP EPS, which is now expected to come in $0.41 below adjusted EPS mostly to reflect losses related to the credit card data breach last December and early debt retirement losses.

The debt retirement losses don't seem like anything out of the ordinary, Target Corporation spent $1 billion to retire a debt with $725 million face value for $285 million pre-tax loss reducing EPS by $0.27. But Grom points out that the data breach losses suddenly include accruals that weren't included in previous expense reports.

"The $148M of expenses includes an increase to the accrual for estimated probable losses for a vast majority of the claims, including claims by payment card networks (expenses recorded in 4Q13/1Q14 did not include any accrual for these payment networks)," he writes, emphasis his. This $148 million is partially offset by $38 million insurance receivable, resulting in a $111 million net expense that will reduce EPS by $0.11.